Over the past three years, Royal DSM NV (“DSM”) has transformed itself into a leading global life sciences company focused on health and nutrition with ~$12 billion of sales and ~$1.7 billion of EBITDA. DSM’s portfolio of businesses also includes legacy activities in materials sciences. While the Materials segments account for ~55% of sales, their profit contribution to the DSM group (~30% of EBITDA) has been greatly surpassed by that of the Nutrition segment (~70% of EBITDA). Earlier this year, DSM shares sold-off following: i) a profit warning in the Nutrition segment, and ii) growing skepticism about DSM’s ability to execute on its plan to divest its commodity caprolactam business. The weakness in DSM’s share price served as an opportunity to build our position. We believe that the profit warning in Nutrition was driven by cyclical factors and abnormally adverse weather rather than any structural changes in the underlying fundamentals. We are also optimistic that management can successfully separate its commodity caprolactam exposure through either a sale or joint venture. Finally, near-term trends are positive in both of DSM’s businesses, with Nutrition starting to show signs of reverting to a more normalized growth rate and Performance Materials starting to inflect from depressed levels given its exposure to rebounding European automotive and construction markets.

DSM group currently trades at 7.5x forward EV/EBITDA. Based on our analysis, we believe that both the Nutrition and Performance Materials segments should command higher multiples than DSM’s current group multiple. The low group valuation is driven by the continued presence of the Performance Materials and Polymer Intermediates segments. These businesses have de minimis end-market overlap or synergies with Nutrition. Furthermore, the non-nutrition businesses are structurally more volatile and have lower returns, making the combined entity cumbersome for investors to analyze and appropriately value.

Comparable companies to DSM’s Nutrition segment trade in the 11x-13x EV/EBITDA range. Given the segment’s secular growth characteristics and high return-on-capital, we believe this multiple range is justified. DSM’s Nutrition business benefits from global scale and presence across the downstream value chain. The company offers customers a unique value proposition through its ability to manufacture and distribute a broad portfolio of nutritional supplements and work collaboratively to create differentiated, customformulatedproducts. It is clear from our research that these competitive advantages have helped DSM win new business. These capabilities are especially relevant given that customers are increasingly outsourcing R&D and supply chain functions.

In the Performance Materials segment, DSM has strong positions in many specialty plastic products and is a global leader in its ultra-strength Dyneema fiber. We believe there would be strategic interest in accessing DSM’s downstream plastics engineering capabilities and high-quality customer relationships. In addition, 40% of the segment’s end-market exposure is to the building and construction and automotive sectors, which are just beginning to show signs of recovery. Given these factors, the value of the businesses within Performance Materials to potential acquirers suggests that a blended multiple of 8.5x EV/EBITDA is achievable for the segment.

DSM offers compelling risk-reward as its portfolio continues to shift toward that of a highquality, higher multiple life sciences company. Exiting the caprolactam business should begin to address the ~40% discount that the group trades at relative to our sum-of-theparts valuation. With its successful history of divesting noncore businesses, we look forward to DSM management’s future efforts to unlock shareholder value via portfolio streamlining.